Blockchain technology — a software-based distributed ledger system — is emerging as the building block of trust for manufacturing value chains. As described inPart 1of this series, blockchains can establish immutable and trustworthy records and transactions among value chain participants without the need for a middle man, significantly reducing the rising “trust tax” in manufacturing value chains.

In addition to lower costs and increased agility, we believe blockchain manufacturing will create entirely new business models (see Figure 1). Traditional value chains will be deconstructed as more players will be able to flexibly plug in and out of the manufacturing process, such as “borrowing” parts of a factory on short notice for only as much production capacity as they need at a given time. Further, niche players such as micro-factories or small 3-D print service providers will be able to expand their markets and serve more customers.

Figure 1

Examples of new manufacturing business models enabled by blockchain include:

Marketplaces for designers to publish their work in the form of 3-D files. Designers will also be able to receive micro-royalties whenever their designs are used.

“Asset-less” or “asset-light” enterprises that add value to product design, marketing and supply chain orchestration. As manufacturing becomes “smarter” through the use of deep data, new business models are emerging in which businesses supply data to otherwise “dumb factories.” These businesses will rely on access to a secure data-sharing infrastructure.

Hyper-specialized ecosystem participants. Such businesses will invest only the time and capital required for strategic activities at which they excel, and hand off other tasks to entities further up or down the value chain through blockchain-enabled smart contracts. They might, for example, specialize only in one step of the manufacturing process (such as chip packaging vs. chip fabrication).

Cloud-based, “software-defined” manufacturing. With these business models, smart contracts would find and finalize agreements with optimal partners, and the knowledge of everything from where to source raw materials, to the best manufacturers, to the location of goods in transit and payment will be stored in reliable, trusted blockchains.

Brokers of data generated along the value chain. Such data could range from production yields for various production processes or combinations of raw materials, to best practices for maintenance or customer support.

Marketplaces for crowd-sourced product optimization services. Crowd-based data will become trusted data on a blockchain. Further, the emergence of reputation engines built on blockchain technology will optimize crowd-based products and services.

Overcoming Challenges

Blockchain technology, thinking and skill sets are still in development. Early adopters will likely face the following issues:

Security. A public blockchain for smart contracts would represent the fundamental standard infrastructure for the “Internet of value.” Highly publicized hacking incidents, however, raise important security concerns. Until blockchain security issues are fully addressed, the majority of blockchains will likely be private, invitation-only ecosystems governed by a discrete set of stakeholders.

Maturity. Two key issues of blockchain include the cost and effort required by the consensus mechanisms and the ability to handle large transaction volumes. We are confident the open-source blockchain community will solve many of these issues, such as scalable blockchain-based databases.

Links to legacy systems. Significant effort may be required to build the interfaces needed between new cryptocurrencies and legacy systems. As organizations wait for de facto standards to emerge, they may want to begin with small initiatives focused on niche products and markets to better understand the technology, opportunities and challenges.

Talent gap. Startups and established players alike will find they lack the necessary skills to execute blockchain efforts at scale. High-demand skills will include cryptographers to develop secure smart contracts, consultants who understand the business implications of blockchain, and technology architects who can use and integrate blockchain technologies and tools.

Corporate cultures. Internal blockchain evangelists will be challenged to convince large, conservative and slow-moving enterprises to move their trust from individuals, organizations or the legal system to mathematical algorithms they don’t understand. Blockchain technology providers may need to offer some type of “bonding” or insurance against loss, much like what banks provide to deposit-holders if their accounts are hacked.

Next Steps

Given the significant investments made by leading players — as well as the potential benefits of initial implementations expected to reach the market by early 2017 — we are confident that blockchain will soon demonstrate its ability to eliminate the manufacturing “trust tax.”

It’s essential to begin experimenting now by funding targeted proofs of concept to explore where and how blockchain thinking can deliver transformative benefits.

This article was written by Burkhard Blechschmidt, a leader in Digital Strategy & Transformation and CIO Advisory at Cognizant Business Consulting, and Dr. Carsten Stöcker, the Machine Economy Innovation Lighthouse Lead at innogy SE. Both are co-founders of the “Genesis of Things” project, a blockchain-based platform initiative for 3-D printing, including a digital product memory.